SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 37849 / October 22, 1996
Admin. Proc. File No. 3-8438
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:
In the Matter of :
:
RICHARD J. PUCCIO :
50 Roosevelt Avenue :
Syosset, New York :
:
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OPINION OF THE COMMISSION
BROKER-DEALER PROCEEDINGS
Ground for Remedial Action
Consent Injunction
Where salesman of registered broker-dealer was
permanently enjoined, with his consent, from violating
antifraud provisions of the securities acts, held, in
the public interest to bar salesman from association
with any broker or dealer with the proviso that, after
five years, he may reapply for such association.
APPEARANCES:
Marvin Gersten, of Gersten, Savage, Kaplowitz & Curtin, LLP,
for Richard J. Puccio.
Richard H. Walker, James P. Bodovitz, David G. Rizzo, Ellen
N. Hersh, Petra T. Tasheff, and Christopher J. Mahon, for the
Division of Enforcement.
Appeal filed: July 25, 1995
Briefing completed: September 28, 1995
Oral argument: July 23, 1996
I.
Richard J. Puccio, a former salesman for Stratton Oakmont,
Inc. ("Stratton"), a registered broker-dealer, appeals from the
decision of an administrative law judge. The law judge found
that, on November 4, 1992, Puccio was permanently enjoined, with
his consent, from violating the antifraud provisions of Section
17(a) of the Securities Act and Section 10(b) of the Securities
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Exchange Act and Rule 10b-5 thereunder. 1/ The law judge
concluded that Puccio should be barred from association with any
broker or dealer, with a right to reapply for such association
after five years. Our findings are based on an independent
review of the record.
II.
Puccio worked at Stratton for more than two years, from
March 1989 to June 1991. It is undisputed that, during that
time, Stratton was operating a classic boiler room. The brokers
sat "cheek by jowl" in a room the size of a basketball court.
All of their desks were lined up side by side in rows. The firm
held mandatory sales meetings every morning at 8:30 a.m. at which
time sales techniques were demonstrated and scripts for the
firm's "house stocks" (i.e., those in which the firm made a
market) were distributed. Brokers were expected to follow the
scripts and only give customers the information they contained.
Brokers were discouraged from doing any outside research, and
told to rely on the firm's research and representations. Aside
from training in high pressure sales techniques, brokers received
no instruction from Stratton management.
After the morning sales meeting, brokers were expected to
spend the entire day (except for a lunch break) on the telephone.
The firm expected a high volume of sales, and if brokers did not
stay on the phone, they were fired. Stratton was run like a
"boot-camp", with all of the brokers' activities closely
monitored and scripted by the firm's principals. At the end of
the day, a second sales meeting was held at which time each
broker was required to report his production for the day.
As we have previously stated, the allegations in an
injunctive complaint settled by consent may be given considerable
weight in assessing the public interest in a subsequent
proceeding. 2/ The charges against Puccio may be summarized as
follows.
When soliciting customers, Puccio engaged in boiler room
sales practices and made material misrepresentations with respect
to the stocks he was selling. He also made fraudulent
representations with respect to Stratton's expertise and
reputation. Puccio failed to disclose that Stratton house stocks
were speculative and that the issuers were new companies with low
revenues and low or negative earnings. He made baseless price
1/ SEC v. Stratton Oakmont, Inc., et al., 92 Civ. 1993 (JES)
(S.D.N.Y.).
2/ Charles Phillip Elliott, 50 S.E.C. 1273, 1277 (1992), aff'd,
36 F.3d 86 (11th Cir. 1994).
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predictions, stating, in some instances, that the prices of house
stocks would more than double in a short period of time. He
discouraged unsolicited customer sell orders without regard to
his customers' best interests, and made material misrepresen-
tations when doing so. If customers insisted on selling, he
induced other customers to purchase the stock without disclosing
that he was recommending a purchase simply to find a buyer for
the selling customer's stock. He falsely stated that "traders"
were sitting next to him buying large blocks of the securities he
was recommending. And, on at least three occasions, he called
the customer of another salesman and introduced himself as that
salesman, inducing the unwitting customer to purchase a Stratton
house stock.
Puccio's admissions at the hearing herein show that he
engaged in knowing misconduct. Puccio was admittedly aware that
he was required to have a personal understanding of the stocks he
was recommending. Yet he conducted no independent research, and
simply passed along to customers the information that was given
to him by Stratton management even when he had a strong basis for
questioning its accuracy. For example, Puccio admitted seeing
the prospectuses for IPS Health Care, Inc. and Ropak
Laboratories, two securities that he recommended to customers.
Both prospectuses disclosed a substantial number of negative
factors about those companies that would clearly have been
material to prospective investors. However, Puccio admitted that
he never told customers anything negative about the stocks he was
selling. Although he claimed that he only looked at the front of
the IPS prospectus and never read it through (which in itself is
indicative of the way he conducted business), even a cursory
examination of the cover page would have disclosed the following
statement:
"The purchase of the Units offered by this Prospectus
is speculative and involves a substantial degree of
risk. Prospective investors should carefully consider
the factors set forth under `Risk Factors.'"
Puccio further admitted that he knowingly misrepresented
Stratton's research capabilities 3/ and, on occasion,
impersonated other salesmen. He stated that the reason for the
firm's policy of discouraging customer sales was its desire to
avoid negative price pressure on house stocks, a circumstance
that he did not disclose to customers. He acknowledged that,
when he dissuaded customers from selling, he was not acting in
their best interests but simply obeying the firm. In fact, he
3/ Puccio conceded that he falsely identified another salesman
at Stratton as the firm's research analyst, and gave a
fictitious description of the purported analyst as "fat,
bald and badly dressed."
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conceded that he always did what the firm wanted him to do
regardless of anything else he thought or knew.
At oral argument before us, Puccio's counsel admitted that
Puccio's conduct at Stratton was "egregious". Counsel stated
that no claim was being made that Puccio "was wrongfully accused"
because "[h]e wasn't." He also acknowledged that the situation
at Stratton was such that it upset everyone in the industry who
looked at it, and asserted that, if everybody at that firm had
been barred for life, he would not be arguing on Puccio's behalf.
Puccio's conduct both prior and subsequent to his employment
at Stratton casts further doubt on his fitness to engage in the
securities industry.
Prior to his employment at Stratton, Puccio worked for
another registered broker-dealer, Investors Center, Inc. ("ICI").
While employed at ICI, Puccio sold a security to an Oklahoma
resident although the security, ICI and Puccio were not
registered in that state. According to Puccio, when he asked how
to open the account and effect the trade, ICI management
instructed him to use a fictitious New York address for the
account. Subsequently, the Oklahoma Department of Securities
brought proceedings against Puccio which he settled by, among
other things, paying a $500 fine. Pursuant to the settlement, at
a time when he was employed by Stratton and engaging in the
egregious misconduct set forth above, Puccio filed a sworn
affidavit in the Oklahoma action that stated in part as follows:
"The [Oklahoma violative] incident . . . was that of an
inexperienced broker taking at face value improper
instruction from his supervisors. The supervision at
Stratton Oakmont is vastly superior to that at ICI, and
now that I am aware of the consequences, and the risks
posed to investors by such conduct, [I] will be
particularly cautious to assure that such actions are
not repeated."
After leaving Stratton, Puccio was employed by another
brokerage firm, Josephthal, Lyon & Ross, Inc. Once again
ignoring his obligation to make an independent investigation of
the securities he was recommending, 4/ Puccio simply relayed to
customers the information contained in fact sheets supplied by
his employer.
4/ See, e.g., Hanly v. SEC, 415 F.2d 589, 595-597 (2d Cir.
1969).
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III.
Puccio contends that the sanction assessed by the law judge
is excessive under the factors cited by the Court of Appeals for
the Fifth Circuit in Steadman v. SEC. 5/ In our view, as set
forth below, the application of those factors shows that Puccio's
sanction is fully merited.
Puccio's misconduct could hardly be more serious. For more
than two years, he engaged in high pressure, fraudulent sales
tactics in utter disregard of his obligations to customers and
their welfare. Even his own attorney conceded that Puccio's
conduct was egregious. We are not dealing here with an isolated
instance of misbehavior. Even before he was employed at
Stratton, Puccio violated the securities laws at ICI. Then, at
Stratton, he engaged in a broad pattern of fraudulent conduct
over an extended period of time. When he finally arrived at
Josephthal, he continued his practice of parroting to customers
whatever information on a security he received from management
without making any independent investigation.
Puccio seeks to minimize the degree of his scienter. He
seeks to portray himself as a young, inexperienced broker who
believed that the sales information given to him by Stratton's
principals was in the best interests of his customers. He argues
that all of his violative conduct resulted from Stratton's
training and supervision. We do not subscribe to Puccio's view
of his conduct. While he may have been relatively inexperienced
at the outset, it could not have taken him very long to realize
exactly what kind of operation Stratton was running. Yet rather
than seeking other employment, he stayed on and flourished in
that environment. For more than two years, he wholeheartedly
embraced Stratton's fraudulent boiler room tactics, earning more
than $100,000 a year. Puccio cannot claim that he unknowingly
relied on his supervisors, the same defense he asserted in the
Oklahoma proceedings. In this instance, he was admittedly aware
that he was engaging in improper conduct.
We question the sincerity of any assurances by Puccio that
he will not engage in future violations. We note that, after he
had been working at Stratton for nearly two years, he filed a
5/ The factors are "the egregiousness of the defendant's
actions, the isolated or recurrent nature of the infraction,
the degree of scienter involved, the sincerity of the
defendant's assurances against future violations, the
defendant's recognition of the wrongful nature of his
conduct, and the likelihood that the defendant's occupation
will present opportunities for future violations." 603 F.2d
1126 at 1140 (5th Cir. 1979), aff'd on other grounds, 450
U.S. 91 (1981).
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sworn affidavit with Oklahoma authorities assuring them that he
would be careful to guard against any repetition of his conduct
at ICI where he "[mistakenly took] at face value improper
instruction from his supervisors."
Puccio further complains that the sanction assessed by the
law judge is unfair since it is harsher than those meted out to
Daniel Porush, one of Stratton's principals, and Clifford
Sharfman, a fellow salesman at Stratton. He also asserts that,
although Stratton employed 80 brokers and 120 cold callers, he is
one of only a small number of persons who have been unfairly
singled out for disciplinary action.
We reject these contentions. Porush was sanctioned pursuant
to an offer of settlement. 6/ As we have repeatedly pointed
out, "it is well established that respondents who offer to settle
may properly receive lesser sanctions than they otherwise might
have received based on `pragmatic considerations such as the
avoidance of time-and-manpower-consuming adversary proceedings.'"
7/
The sanction imposed on Sharfman to which Puccio refers was not
imposed by this Commission but by the District Court in our
injunctive action. 8/ Although we sought a permanent
injunction against Sharfman, the Court excluded him from the
securities business for only one year. While, as Puccio points
out, the Court cited what it considered the lenient treatment
accorded Porush, the Court also stated that it was unable to
conclude that Sharfman was aware of the high probability that his
representations to customers were false. We have no difficulty
in concluding that Puccio was aware of that probability.
Puccio's claim that he was unfairly singled out is equally
without merit. The fact that proceedings have not been brought
against others at Stratton is irrelevant. Moreover, to establish
a claim of selective prosecution, a respondent must demonstrate
not only that he was unfairly singled out, but that his
prosecution was motivated by improper considerations such as
race, religion, or the desire to prevent the exercise of a
6/ Stratton Oakmont, Inc., et al, Securities Exchange Act
Release No. 33778 (March 17, 1994), 56 SEC Docket 822.
Porush was fined $100,000, and suspended for one year from
association in a supervisory capacity with any broker,
dealer, investment company, investment adviser or municipal
securities dealer.
7/ See David A. Gingras, 50 S.E.C. 1286, 1294 (1992), and the
cases there cited.
8/ SEC v. Stratton Oakmont, Inc., 92 Civ. 1993 (JES) (S.D.N.Y.,
April 21, 1995). We grant Puccio's request to admit the
Court's bench opinion into evidence.
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constitutionally-protected right. 9/ No such showing was made
here.
Finally, Puccio argues that we may not properly consider the
Oklahoma proceeding against him because it was not charged in the
order for proceedings. He also appears to contend that it was
necessary for that order to repeat all of the allegations in the
injunctive complaint against him. These contentions are without
merit. No allegation was required with respect to the Oklahoma
proceeding. As we have previously pointed out, "respondents in
disciplinary proceedings must or should be aware that their prior
disciplinary records are almost always a significant factor in
determining appropriate sanctions, and will normally be taken
into account." 10/ The order for proceedings herein
explicitly refers to the allegations in the injunctive complaint,
which was itself admitted into evidence. Moreover, since this
proceeding is based on Puccio's consent injunction, the charges
in the injunctive complaint are taken into account as a matter of
course in assessing the proper sanction in the public interest.
11/
In light of the foregoing, we conclude that the sanction
assessed by the law judge is more than warranted in the public
interest. 12/
An appropriate order will issue.
By the Commission (Chairman LEVITT and Commissioners
WALLMAN, JOHNSON, and HUNT).
Jonathan G. Katz
Secretary
9/ See George H. Rather, Jr., Securities Exchange Act Release
No. 36688 (January 5, 1996), 61 SEC Docket 36, 39 n.5, and
the authorities there cited.
10/ Howard Alweil, 51 S.E.C. 14, 17 (1992).
11/ See Charles Phillip Elliott, supra.
12/ All of the contentions advanced by the parties have been
considered. They are rejected or sustained to the extent
that they are inconsistent or in accord with the views
expressed herein.
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
SECURITIES EXCHANGE ACT OF 1934
Rel. No. 37849
Admin. Proc. File No. 3-8438
-----------------------------------
:
In the Matter of :
:
RICHARD J. PUCCIO :
50 Roosevelt Avenue :
Syosset, New York :
:
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ORDER IMPOSING REMEDIAL SANCTION
On the basis of the Commission's opinion issued this day, it
is
ORDERED that Richard J. Puccio be, and he hereby is, barred
from association with any broker or dealer with the proviso that,
after five years, he may reapply for such association. Such
application should be made to the appropriate self-regulatory
organization or, if there is none, to the Commission.
By the Commission.
Jonathan G. Katz
Secretary